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Clean Development Machanisma pathway to future

sustainable development
Sujit Dutta
Head of the DepartmentMBA
Institute of Engineering & Management
Kolkata

Technology Transfer &

Project Financing

Developed
Countries

Developing
Countries

CDM

260

in developing countries contributing to their sustainable

development.
Clean Development Mechanism

Introduction
he first commitment period of KyotoProtocol,
the global legally binding agreement for
reducing emissions on which the current carbon
market is basedwill come to an end in December
2012.The existing Kyoto Protocol, the only pact that
imposes legally binding cuts though only on
developed countries, extended till the end of 2017.
The Durban Conference agreed to extend Kyoto
Protocol for a second period from January 2013 to
December 2017. After Durban conference, due to
extension of the Kyoto Protocol Mechanism, more
and more companies will be looking towards
environmentally sustainable projects through clean
development mechanism. This will bring certainty to
the UN-backed carbon trade. Market will be positive
and more Indian companies will invest in the CDM
projects. This will bring enormous growth in carbon
credit trading and Indiabeing the second largest
supplier of carbon creditit will bring tremendous
opportunity for Indian Inc. to earn revenue from
carbon credit through CDM project.
Objective
The objective of this study is to focus on key
underlying issues of the CDM and to bring attention of
the policymakers to take the mechanism forward and
unleash the huge potential lying ahead of the industry.
What is CDM?
The CDM is a full-fledged offset standard. It is an
economic instrument for inducing initiatives to meet the
challenges faced by the impending threat of climate
changes. The CDM mechanism creates a platform in
which developing countries can voluntarily participate
in the long term global climate actions. The aim of the
CDM out of the three flexible mechanism of Kyoto
Protocol is to assist sustainable development of
developing countries. According to Article 12 of the
Kyoto Protocol, the CDM allows Annex I countries to
invest emission reduction projects in developing
countries and receive credit in the form of Certified
Emission Reductions (CER), which they may count
against their obligatory reduction targets. Through this,
industrialized countries can finance mitigation projects

Carbon Credits

CDM Project Flow Chart

Activity
Project
Identification
And Formulation

National
Approval

Output

Accredition/
Designation

PDD

PP

Letter of
Approval

DNA

Validation
Report

DNA

It is the Responsibility of the

DNA to determine Environmental Sustainability

The PDD is approved by DOEA after available public

suggestions

CDM-EB
The PDD and validity report is

Validation

submitted to EB i.e. project is

big

Investor

Registration

Bi-lateral mode, Uni-lateral

mode, Multi-lateral mode

Project Financing
Monitoring

PP

The monitoring report is

by DOE-A to
DOE-B

submitted

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Varification/
Certification

Issuance of CERs

DOE-B
Verification
Certification
Report

Verification report is
produced and
certification report
is issued to EB

CDM-EB

CERs are issued

by EB

Note : DNA : Designated National Authority; DOE:

Designated Operational Entity; PP: Project Participants/
Proponents; EB: Executive Board; PDD: Project Design
Document; CER: Certified Emission Reductions
Ensuring Sustainability Development
CDM is an eventual result of a long evolution from
a proposal by Brazil, a leading developing country.
Most developing countries are struggling to get out
of poverty. Many developing countries expect CDM
to facilitate a substantial transfer of technology and
other resources to support economic growth. An
important question about CDM is whether it can
support to initiate projects that serve both climate
change mitigation and sustainable development
objective. If CDM does not make its expected
contribution to sustainable development, then support
for it is likely to erode.
Sustainable Development
Social : Generation of employment directly and
indirectly during operational and construction phase of
the project is to be ensured. Whenever a project is started
it provides many opportunities to the small-scale
entrepreneurs around the project that enables the local
people to have steady source of income for their
livelihood. The project is also expected to create business
opportunities for local stakeholders such as bankers,
manufacturers, contractors, suppliers and so on.
Economical : The project facilitates earning
additional revenue to the government. There will be
inflows of fund through the sale of CERs and this will
bring direct and indirect positive economic growth
in the region as well as country.
Environmental : Use of modern technology will
result in GHG emissions and thus reduce the
environmental impact in the region. CDM project
ensures real, measurable and long term emission
reductions.
Technological : Transfer of new technology and other
resources is a key element of CDM project. Modern and
new technology will help in enhancing the skill and
knowledge base of the employees. This can help other
projects in the country to acquire technology and
encourage capacity building across the country.
Eligible Sectors for CDM Projects
The important sectors which have potential for
CDM projects in developing countries include the
following :

Agriculture
Buildings (residential, commercial, and government buildings)

Energy generation, distribution and use

Forestry

Industry and Manufacturing activities

Mining

Transport

Waste Management
CDM from Indias Perspective

CDM projects in few developing countries and, and the

global scenario (as on 16th May 2011). Source: UNFCCC

CDM projects in few developing countries and, and the

global scenario (as on 16th May 2011). Source: UNFCCC
Some emerging issues
To ensure the potential of CDM as a market based
instrument for encouraging investments from the
developed countries and to stimulate the project
proponents in developing countries, there are certain
issues which need to be addressed and these relates
to whether

It will help in enhancing the knowledge

(contd. to page 266)

The art of communication is the language of leadership.

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James Humes

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Sustainable GrowthThe Accountants role

Sreenivas Garimella
B.Com., PG Dip PPM, ACMA
Team Manager, SBSC, Chennai

he recognition governments and many

organizations have given to the importance of
sustainability and sustainable development is
beginning to change business culture and society. The
global challenge is to ensure that organizations
develop sustainably to reverse the previous erosion
of natural resources, and to improve their
environmental, social, and financial performance. This
requires radical changes in the way they do business
and the way we live our lives.
From an environmental and social perspective,
sustainability issues are transforming the competitive
landscape, forcing organizations to change the way
they think about products, technologies, processes,
and business models. From a financial perspective,
the primacy of shareholders as owners is giving way
to an enlightened view of maximizing wealth creation
that incorporates wider stakeholder perspectives and
issues into decision making. Long-term sustainable
value creation requires responsible organizations to
direct their strategies and operations to achieving
sustainable economic, social, and environmental
performance.
Achieving a sustainable future is only possible if
organizations recognize the role that they can and
need to play. Effective action by the accountancy
profession and professional accountants to better
integrate and account for sustainability is an essential
part of that role. Every organization today strongly
believes that these professional accountants
can influence the way organizations integrate
sustainability into their mission, goals and objectives,
strategies, management and operations, definitions of
success, and stakeholder communications.
Professional accountants in all types of organization have a significant role in :

challenging conventional assumptions of doing

business, identifying risks, and seizing
opportunities;

integrating sustainability issues into strategy,

operations, and reporting;

redefining success in the context of achieving

sustainable value creation;

262

establishing appropriate performance goals and

targets;

encouraging and rewarding the right behaviors;

and

ensuring that the necessary information,

analysis, and insights are available to support
decision making.
Considerable progress has been made on defining,
spreading awareness and gaining recognition that
long-term sustainable organizational success and
value creation is only achievable when organizations
direct their strategies and operations toward achieving
sustainable economic, social, and environmental
performance.
Many of the corporate governance reform efforts
are using the language of sustainability, stakeholder
governance, and encouraging governing boards to
take a longer-term view of performance, as the
philosophy revolves around leadership, sustainability,
and corporate citizenship.
Corporate do believe and understand that the
sustainable success of an entity over the longer term
as a key component of effective board practice. Vast
majority of CEOs see sustainability as important to
their companys future success in spite of economic
difficulties. However, significant challenges remain for
organizations, including integrating social and
environmental (along with financial) factors into an
organizations way of doing business in all the core
elements of the organization, and across the supply chain.
Another challenge is engaging small-and mediumsized entities (SMEs). In most countries, SMEs account
for a sizeable portion of private sector employment
and gross domestic product. With regard to
environmental and social issues, SME impacts are
considerable, and therefore have vast potential to
contribute to sustainable economies. The integration
of social and environmental factors is critical if
organizations are to gain the trust of stakeholders and
the wider public. It is felt to reinforce the importance
of information reporting and to expand from a
business strategy and operational perspective to that
of an integrated reporting perspective. Integrated

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COVER THEME
reporting is emerging as a new theme and is wellsupported.
Integrating sustainability issues into business
strategy and operations is now covered in more depth
that reflects new thinking. The reporting perspective
has been updated to provide guidance on how to
improve stakeholder communications, based on
sustainability reporting and providing an integrated
view of environmental, social, and financial
performance. The integration of sustainability
information with mainstream financial reporting will
increasingly be critical to maintaining the trust of
customers and investors.
Connecting Professional Accountants to
Sustainability
Professional accountants are categorized and seen as
creators, enablers, preservers, and reporters of
sustainable value for their organizations. Expectations
are set in business as derived from the activities that they
perform to support the development of sustainable
organizational success. The professional expertise
acquired and orientation equips them with the necessary
qualities to support their contribution, and particularly
to act as integrators by incorporating sustainability
factors into their organizational strategy, operations,
and reporting. This will allow organizations to
simultaneously deliver improved business performance
and to contribute to a better world.
Every organization clearly highlights the role of
professional accountants to be more than simply that
of preparers or assurers of financial and sustainability
reports. More than one-half of all professional
accountants globally work in organizations and are
adapting to a world in which sustainability is the key
to long-term organizational performance.
The organizational objectives and goal statements
framed helps professional accountants to understand
how, in their diverse roles, can influence change.
Defining clearly the different facets of sustainability
and corporate responsibility in organizational
framework, can help professional accountants grasp
all the important aspects of sustainability that they
may encounter, directly or indirectly, and that would
be important to their organizations.
Role of Professional Accountants and the Finance
Function
The organizational framework will provide
professional accountants with an opportunity to
consider themselves as knowledgeable change agents.
Professional accountants are well-positioned to help
organizations interpret sustainability issues in a
relevant way for their organizations, and to integrate
those issues into the way they do business. Although
developing a sustainable organization is a multi-

The Management Accountant |March 2012

disciplinary responsibility, the finance function needs

to be clear on its role in providing and supporting
sustainability leadership for several reasons:
The finance function is well placed to influence
behavior and outcomes through incorporating
sustainability considerations into strategies and plans,
business cases, capital expenditure decisions, and into
performance management and costing systems.
Integrated sustainability management involves
managing opportunity and risk, measuring and
managing performance, and providing insight and
analysis to support decision making. This plays to the
strengths of professional accountants working in
finance functions and offers opportunities to provide
higher value business partnering.

Improving the quality of stakeholder

communications and the reporting of sustainability
information and how it connects to an organizations
strategy and operations requires the same rigor as the
process of financial reporting. Materiality, relevance,
comparability, accuracy, and completeness continue to
be essential qualitative characteristics of information.
Professional accountants understand the need for,
and how to implement quality data and robust
systems to capture, maintain, and report performance.
They also have the project management skills needed
to put such systems in place, applying appropriate
processes and controls.
To rise to the challenge, professional accountants,
on an individual level, will need to understand how
sustainability does or might affect their role, and to
identify and utilize the continuing professional
development resources available. Continuing
education will help accountants learn more about the
applied aspects of sustainability and determine
approaches to organizational improvement and
transformation.
Accountants working in audit and advisory roles,
particularly in SMEs, can consider how they could
embrace sustainability issues to add value to their client
service/ advisory role. Importantly, when acting in a
public interest-related reporting or advisory capacity, it
might be necessary to consider whether sustainability
issues have been properly addressed and disclosed.
Organizational Perspectives and Key Considerations
Many accountants find it very difficult to get a
coherent view of all the various perspectives of this
topic due to overloaded information available from
various sources. Fundamentally, it has been observed
that organizations that have successfully embraced
sustainable development have usually taken actions
to cover (1) business strategy perspective,
(2) operational perspective, (3) reporting perspective.

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From the business strategy perspective, the
emphasis is adopting a strategic approach, so that
sustainability is integrated into vision and leadership,
strategic planning, objectives, goals, and targets, as
well as incorporated into governance, accountability
arrangements, and risk management.
The operational perspective focuses on how an
organization can deliver on its strategy and specific
sustainable development objectives and targets. It
presents a full spectrum of management and
management accounting activities to support higher
quality information, which leads to more-informed
decision making and can help support the choices an
organization needs to make to chart a more
sustainable path. This perspective covers how
organizations can achieve relatively simple quick wins
to improve energy efficiency and reduce waste,
calculate a carbon footprint, and implement
sustainability and environmental accounting,
integrated management control systems, and
performance measurement and KPIs.
The reporting perspective covers on how accountants
can help improve the usefulness and relevance of their
organizations external communications, including
developing a reporting strategy to help achieve
integrated business reporting. Professional accountants
can lead the way in developing a reporting and
disclosure strategy to help yield high-quality reports
and accounts that provide a more complete picture of
an organizations performance. This will involve
reflecting sustainability impacts in financial statements,
improving narrative reporting, determining
materiality in relation to the needs of various
stakeholders, and establishing an approach to external
assurance that adds credibility to an organizations
disclosure and can also help to improve an
organizations reporting processes.
Let us review the key considerations for each of
the above dimensions :
Business Strategy Attributes
Defining Sustainability
and Sustainable
Development

Key Considerations

Stakeholder Engagement

Goals and Target Setting

Integration with Risk

Management

Engagement of Suppliers

Create awareness of how the finance

function can get involved in establishing
a business case
Ensure clarity on uses of the business case
Focus the business case on linking
sustainability to strategy and the impacts
of organizational activity on society and
the environment
Identifying significant, material, and
relevant environmental and social issues.
Understanding sustainability issues and
their relationship to a particular organization is an important precursor to establishing an approach to dealing with them.
A strategic approach to sustainability helps
to identify a range of competitive strategies.
Values guide behaviors and decisions.

(contd.)

264

Business Strategy Attributes

Key Considerations

Vision and Leadership

(contd.)

Operational Attributes
Cutting Cost by minimizing
waste

Integration of sustainability into the key

business drivers requires leadership and
ownership within the governing body
and at all management levels.
Managerial and operational structures
deliver the vision and strategy and ensure
accountability and ownership.
Reinforce the importance of stakeholder
engagement.
Establish a systematic and carefully
planned approach to entering a dialogue
with stakeholders.
Stakeholder dialogue can help managers
consider how best to deal with the tradeoffs between economic, social, and
environmental performance.
Ensure that ongoing stakeholder
engagement initiatives are continuous,
dynamic, and periodically reviewed.
Build the knowledge and professional
skills needed to deal with the challenges
of understanding and balancing
stakeholder expectations.
Establish goals, targets, and performance
measures.
Identify outcomes where possible.
Engage employees involved in executing
strategy .
Link to rewards.
Establish a baseline against which
progress can be monitored.
Integrate sustainability issues into risk
management and other management
systems.
Gather information and assess cost benefit.
Assess potential impact.
Interpreting risk and causation.
Dealing with opportunity and risk
The overriding importance of values and a
risk-based perspective to guide decisions.
Identify the opportunities associated with
sustainable procurement.
Supplier monitoring and support is
ongoing via periodic meetings and
training, and with the consideration of
collaborative opportunities.
Consider a systematic process for
supplier selection that is clear to all
potential and current suppliers.
Communicate how an organization
builds relationships and does business
with business partners and suppliers.
Key Considerations

Identifying large environmental costs that

could be reduced
Monetizing procedures for costs, savings, and
revenues related to any business activities with
a potential environmental impact.

(contd.)

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(contd.)

(contd.)

Business Strategy Attributes

Key Considerations

Carbon Foot printing

Improving information to
support decisions and
reporting

Integrated Management
control Systems

Performance
Measurement and KPIs

Reporting Attributes
Develop reporting strategy

Reporting Attributes

Using measurement and targets and

ensuring accountability.
Small (and no cost) changes can lower energy
costs and reduce carbon emissions.
Spreading awareness.
Spreading awareness.
Tracking physical accounting information.
Reviewing and understanding the
impact of legislation regarding waste.
Changing processes.
Moving beyond a GHG inventory.
Determine how to manage carbon
emissions data.
Distinguish between boundaries, in terms of
organizational and product footprints, and
between entities in the supply chain.
Establish principles of a carbon audit
report and the key issues to be disclosed
in external reports for stakeholders.
Greenhouse gas inventory audit.
Moving from a conformance- to an integrated
performance-based view of accounting
for sustainability impacts
Identifying, defining, and classifying costs to
motivate desired activities and behaviors
Working across organizational
functions, particularly integrating
accounting, procurement and operations
Accounting for social costs and valuing
social impacts
Using environmental and social cost and
other non-financial information for
project appraisal and capital budgeting

Reflecting impacts in
financial statements

Transparency to Investors

Determining Materiality

External Review
and Assurance of
Sustainability Disclosures

Use reporting frameworks and guidelines

to help develop reporting processes and
to ensure that all relevant sustainability
information is disclosed.
Meeting stakeholder needs in all markets.
Establishing how to reflect environmental
(and, where applicable, other sustainabilityrelated) liabilities and costs in
financial statements prepared under IFRSs.
Determining specific sustainability
disclosure requirements under national
securities regulations and Generally
Accepted Accounting Principles (GAAP).
Avoiding over-disclosure and clutter. As
is the case for other aspects of business
reporting, the challenge for sustainability
related disclosures in the MC (and in
separate sustainability reports) is to avoid
disclosing too much information,
particularly immaterial clutter. For
example, disclosing all risks that an
organization faces could reduce the
visibility, and therefore the relevance and
understandability, of key risks.
Ensuring a forward-looking orientation.
An annual report will incorporate both
past performance and prospective events.
Viewing narrative reporting as a fair
reflection of the management information
used internally.
In defining report content, materiality should
be considered along with the need for other
important information characteristics.
Accountability for materiality thresholds
and judgments.
Materiality testing can also apply to the
sustainability issues that potentially
apply to the sector in which an
organization operates
Determining a process for resolving different
expectations regarding materiality.
Where information is reported can help (a) to
reinforce materiality criteria, and (b) to keep
the length of disclosures manageable
(particularly where the application of
materiality might vary between reporting for
wider stakeholders from investors).
The quality of external assurance is directly
linked to stakeholder inclusiveness.
Clarifying the purpose and scope of the
assurance.
Establishing the type of engagement.
Enhancing the assurance statement.

References

Key Considerations

MCSs should incorporate specific activities

that support sustainability goals and
objectives into the organizations overall
management and control cycle.
MCSs should ideally help to integrate
social and environmental factors
alongside financial and quality factors
(Internal) control effectiveness depends on
effective governance and risk management.
Integrate sustainability measures where they
have been identified as an important
driver of strategy.
Judge how scientific cause-and-effect
relationships between measures need to
be to inform decisions.
Develop and use eco-efficiency
indicators to link monetary and physical
information for decision making
Develop and use socio-efficiency indicators
to better understand social impacts.

Key Considerations

Determine the range of users and their needs

for various types of reports and disclosures.
Break down functional silos to facilitate
effective integrated reporting.

(contd.)

The Management Accountant |March 2012

IFAC website www.ifac.org.

BT Group, Changing World : Sustained Values, Our 2010
Sustainability Review (London, 2010).
CorporateRegister.com, Assure View, The CSR
Assurance Statement Report (London, 2008).

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American Institute of CPAs, Canadian Institute

of Chartered Accountants, and Chartered Institute
of Management Accountants, Evolution of Corporate Sustainability Practices: Perspectives from
the UK, US and Canada (London: CIMA, 2010).
Association of Chartered Certified Accountants and
KPMG, Environmental Liabilities: Paying for the Past,
Providing for the Future (London, 2002).

Integrated Reporting Committee, Framework for

Integrated Reporting and the Integrated Report,
Discussion Paper (Johannesburg, 2011).

Become Energy Efficient, US Small Business

Administration

Various other references from British Library and from

internet.

(contd. from page 261)

and skill of the employees with the new

technology.
It will help in increasing the direct and indirect
employment opportunity.
It will reduce pollution at the facility.
It will contribute to a better local environment
for the employees and the surrounding
community.
It will help in improving the social status of the
people in and around the project.
It will demonstrate the use of any new financial
mechanism.
It will generate additional revenue for the
company.

Conclusion
The CDMan innovative flexible mechanism
under the Kyoto Protocolhas the objective of
assisting developing countries in achieving
sustainable development. It has been successful in
giving momentum for clean energy projects. CDM
activities witnessed steady progress over the years.
It has helped in raising awareness of global warming
and climate change. Hence, it is important to
ensure that CDM continues to grow and promote
environment-friendly projects.
CDM implementation brings opportunities as well
as threats. Hence, role of the government is all the
more important. The government will play a
significant role in making policies and the objective
of the policy making is to take advantage of the
opportunities while be more effective in neutralizing
the threats. Often its the journey, which is more
worthwhile than the destination itself. A new path
but its important that the path being followed is the

virtuous one.

References

Augus P. Sari and Stephen Meyers , page 19, May1999,

Clean Development Mechanism : Perspectives from
Developing Countries.
Bas Associates Consulting Ltd, Page 1, Background to
Clean Development Mechanism.
Page 15, Clean Development Mechanism in Asia and
the PacificIssue, challenges and opportunities ST/
ESCAP/2292
CDM Basics, Pages 1, 3 and 4 Indian Institute of
Sustainable Development.
IGES CDM Project data analysis & forecasting.
Jennifer Brook, September 17-19, 2007, International
Volunteering and Co-operation Climate Change.
Liguang Liu, Page 1,9, 21, May 2006, Clean
Development Mechanism in China : Seeking Synergies
to Achieve Sustainable Development.
N B Rao, Pages 1,13,14, The New Greenback.
NSWAI ENVIS, Seventh Issues 2007.
Pavan Sukhdev, March 2008, Global Warming and
IndiaCreating a New Consciousness
Sarah Jeveed, November 2010 Clean Development
Mechanism : Kyoto Protocol Hangs In Balance.
Soumitra Ghosh and Subrat Kumar Sahu, pages 3,
5,November 2011, The Indian Clean Development
Mechanism : Subsidizing and Legitimating Carbon
Pollution.
World Bank, State and Trends of the Carbon Market,
June 2011.
World Bank, Thompson Reuters Point Carbon,
Bloomberg New Energy Finance and Ecosystem
Marketplace
www.wikipedia.org.
www.rediff.com India Business Business Headline
Emission Trading,2007. http://en.wikipedia.org/
wiki/Emissions Trading.

Vision is not enough. It must be combined with venture. It is not enough to stare up the steps, we must step up the
stairs.
Vaclav Havel

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